Housing Made A Big Turnaround In 2012

It is possible, maybe even likely, that 2012 will be remembered as the year the housing market finally turned around. Across the country, on average, home prices for the year are expected to rise about 6 percent. Foreclosures remain a problem in some areas, but less so than in recent years. And looking ahead, the Federal Reserve is saying it will keep interest rates low until the labor market improves, which means borrowing costs to buy a house will also remain low. Here to discuss the year that was and the year ahead for housing is NPR's Yuki Noguchi. Good morning, Yuki.

YUKI NOGUCHI, BYLINE: Good morning.

WERTHEIMER: So, what would you say is the most notable change of this year?

NOGUCHI: Well, definitely the rise in home prices. Partly, this was driven by investors who are snapping up the available homes, so much so that in fact inventory in much of the country is very, very low. Also, you know, for every 5 percent rise in home prices, there are about two million fewer homeowners who are underwater on their homes, meaning it would be much easier for them to sell or refinance their homes without taking a loss.

WERTHEIMER: And being underwater, owing more money than your house is worth, that has been a huge problem.

NOGUCHI: Definitely. There are at least 10 million households who still are in that position that you're talking about, being underwater on their loans. And that is a drag on the economy because those people generally can't move, they can't upgrade, they don't spend money, because their homes had lost value.

WERTHEIMER: So, can you tell us about the foreclosure problem? Why is it improving? Have foreclosures peaked?

NOGUCHI: Well, it depends on what state you live in whether it's peaked or not. You know, certainly some states still have a big foreclosure problem. What's interesting is that the epicenter of that crisis has moved. So, it's no longer the sand states, you know, the Western states, like Nevada, Arizona and Southern California, that have the biggest issues. It's New York, New Jersey, Illinois and Ohio. So, it's moved eastward.

WERTHEIMER: What about for the country overall? Is housing a dragging down the economy still?

NOGUCHI: Taken as a whole, no. For the first time in five years, in fact, housing started contributing to economic growth in 2012. Housing starts are rebounding from their lows. And, as I said earlier, inventory is very low and construction is picking up. And next year it's expected to pick up even more. So, the underlying dynamic that's boosting the housing industry overall is demographics. Fewer people bought homes or moved out of their parents' homes in recent years when the economy was bad. But this year household formation really starting to pick up and get back to normal. So, housing itself makes up a pretty small slice of the U.S. economy - about 5 percent normally. But with every house that's bought, there's what economists call the multiplier effect, meaning people will buy furniture, they will pay people to paint their homes or carpet their homes. And those things contribute much more to the economic activity. So, when you factor those things in, the effect on housing could be pretty big.